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SECOND EXAM REVIEW GUIDE PT 2 This part of the guide is to help you develop a methodology to answer the 10-15

questions that will be based on case scenarios. On the exam, I will present 3 case scenarios with a number of facts in them. You will need to answer a series of questions, typically 5, for each scenario. The cases may address any part of contract law, from whether or when a contract was created, to whether it was breached and the measure of damages. Not every question will require you to decide all such issues, but you will need to be able to analyze your way through the scenario. Here is a methodology in the form of a series of issues to analyze that will give you one way to approach these questions: I. Was a contract formed?
1. What law governs? Common law or UCC? If the scenarios deals with

a sale of goods, then UCC; otherwise common law


2. Do the parties have capacity to contract? If not, what is the

effect on the contract? Remember that parties are presumed to have the ability to contract; this will only be an issue if the scenario tells you facts that suggest a party is or may be a minor, incompetent or impaired. Contracts with parties that lack capacity are either void or voidable, depending on the circumstances 3. Was an offer made?
a. Did a party make an offer that met the legal requirements

of a valid offer? Communication, intent and definiteness


b. Was the offer terminated in any way before it was

accepted? Lapse, revocation, rejection, counter-offer, etc.


4. Was there an acceptance of the offer?

a. Did the accepting party communicate an intent to accept the offer?


b. Was the acceptance communicated properly? (Any method

of communication is considered permissible unless the offer specifies a method of communication)

c. Did the acceptance accept all material terms of the offer,

or did it modify them in any way? (remember that in the latter case under the common law rules, it is really a counteroffer even though the party may say it is accepting)
d. If a counter-offer was made, was it accepted? Go through a

similar analysis as to the original offer


5. Was there any conduct that invalidated consent, such as

duress, undue influence, fraud, misrepresentation, mutual mistake? Again, this will be an issue only if the case presents specific facts suggesting invalidating conduct
6. Did the contract provide consideration to both sides?

a. Did each side get something it bargained for? b. Was the exchange legally sufficient, either a legal benefit to the side receiving it, or a legal detriment to the side giving it? (was any promise illusory? Was it a pre-existing obligation; was it past consideration?) c. Was the consideration an illegal bargain?

7. Was the contract required to be in writing? If so, was there a sufficient writing? 8. Was there any third party to the contract, such as a beneficiary, assignee or delegee?

II.

Discharge of the Contract 1. 2. Was the contract completely and properly performed by both sides? If the contract was not completely performed, was the contract or part of it discharged by mutual agreement? (mutual rescission, substituted contract, novation, accord and satisfaction) If the contract was not completely performed, was the contract discharged by operation of law? (7 factors)
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3.

4. 5.

If the contract was breached, by whom and how? (remember to consider the effect of conditions on when/if duties arise) Was the breach material? Or was there substantial performance?

III.

Remedies 1. 2. 3. What remedies would be available in this situation? What is the measure or value of the available remedies? What remedies might be inconsistent and require an election?

What follows are two case scenarios used on a prior exam for contracts, exactly like they were on the exam. After each scenario, I will then discuss the questions and explain how I came up with the answers.

Case 1. Sherman Looks for a Home


Sherman, an apartment renter, decides that the time has come to buy his first home. He looks at a number of condominiums nearby and finds a new development he likes. The salesperson, Marybeth, shows him two different units that are available. Sherman is interested in both and can't decide which he wants to buy, so he asks Marybeth to put together a proposed contract for each unit. She emails him both draft contracts, signed by her, and tells him to sign and return the one he chooses. The proposed contracts state that the offers will remain open for one week from the contract date of March 15. Although he receives the contracts, he still can't decide which one he wants, and is looking at other properties as well. On March 25, Sherman decides he wants to buy one of the units and signs and faxes that contract back. Marybeth calls him and tells him that not having heard from him, the development had offered the unit to another person the day before who purchased it. She tells Sherman that the other unit is still for sale and that if he is interested, he may still buy it, but must do so quickly as it is being shown to other buyers. Sherman then signs the contract for the second unit, but only after altering the language in the contract that requires him to pay a deposit of 5% of the purchase price within a week of signing the contract, by changing it to 2.5%. He faxes the agreement back to Marybeth on March 27. She notices the change and calls him to tell him that they cannot accept the change because they have a standard policy on deposits and cannot make an exception. She does not initial the change on the contract to indicate
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her approval. Two days later the development enters into a contract with another buyer on the unit. Q1. Was the March 25 fax a valid acceptance of the proposal on the first unit? a. Q2. Yes. b. No

What was the earliest date that the March 15 proposal may have ceased being an acceptable offer to sell the first unit? a. b. c. d. March 22, when one week expired. March 24, when the unit was sold. March 25, when Marybeth told Sherman the unit had been sold. The offer remained open until Sherman accepted it.

Q3.

Did Sherman's sending back the signed and modified contract proposal for the second unit create an enforceable contract? a. Yes. b. No

Q4.

Assuming that Sherman's change to the second contract constituted a counteroffer, when was that offer rejected? a. b. c. When Maybeth told him that the development could not accept the change on the deposit amount. When the development signed a contract with another buyer. The counter-offer was not rejected.

Q5.

If Marybeth had been able to accept different deposit amounts, was she legally obligated to do so after Sherman sent in the second contract? a. Yes. b. No

Answers and Analysis for Case 1:


Q1. Was the March 25 fax a valid acceptance of the proposal on the first unit? a. Q2. Yes. b. No

What was the earliest date that the March 15 proposal may have ceased being an acceptable offer to sell the first unit? a. b. c. d. March 22, when one week expired. March 24, when the unit was sold. March 25, when Marybeth told Sherman the unit had been sold. The offer remained open until Sherman accepted it.

These two questions require a determination of whether an offer was made, whether the offer remained open, and whether it was validly accepted. Marybeth sent draft contracts to Sherman for both units, giving him the choice of which one to sign. These drafts can be assumed to be sufficient offers since they would have all the key terms in them. However, the proposals indicated that they would be open for one week. An offeror can expressly limit the duration of an offer. In this case, the offers lapsed when they were not accepted by March 22, one week later. Thus, no offers were pending from the condominium when Sherman sent the signed proposal back. The answers to the questions are thus No for Q1, and March 22 for Q2.
Q3. Did Sherman's sending back the signed and modified contract proposal for the second unit create an enforceable contract? a. Q4. Yes. b. No

Assuming that Sherman's change to the second contract constituted a counteroffer, when was that offer rejected? a. b. c. When Maybeth told him that the development could not accept the change on the deposit amount. When the development signed a contract with another buyer. The counter-offer was not rejected.

When Marybeth told Sherman that he could still buy the other unit, she thus re-offered that unit, but she made it clear that it would only be open as long as it had not been sold to another buyer. Sherman could thus have accepted the offer, but when he made a change to the contract of reducing the deposit, he modified the acceptance so that it did not match the offer. Since this is a sale of real estate, the common law rule, that the acceptance must match the offer in all material respects, is applicable. Shermans supposed acceptance was actually a counter-offer even though Marybeth had already signed it. When Marybeth saw the changed term, she did not accept it, thus rejecting his counter-offer. The answer to Q3 is therefore No. Because a verbal notification of rejection is effective when it is communicated, and that occurred first, the counter-offer contract was rejected at that time. The answer to Q4 is therefore the first choice, a.
Q5. If Marybeth had been able to accept different deposit amounts, was she legally obligated to do so after Sherman sent in the second contract? a. Yes. b. No

This question tests your common sense as well as concepts of contract law. A business is never legally obligated to do something unless it has a duty to do so under statutory, tort or contract law. Even if Marybeth had the discretion to accept a lower deposit, she was under no duty whatsoever to do so. Nothing in the question gives us any reason to believe that the development had a duty to accept a different amount.

Case 2. In early 2009, RapStar Records wanted to lower the costs of production of its music CDs, and began discussions with Suny Corporation about purchasing blank CDs and cases in bulk for RapStar's CD printing facility. On February 1, 2009, Suny's sales manager sent a letter proposal to RapStar which said the following Here are the terms we can offer: Suny will agree to provide blanks CDs in cases for the price of $1.00 per dozen provided RapStar agrees to order a minimum of 12,000 units (1000 dozen) per month, orders to be placed by the first day of the month. The price per unit if RapStar orders less than 12,000 units per month will be $1.50 per dozen. The agreement will be for 18 months. These terms are for negotiation purposes only, and any final contract must be set forth in a separate contract once the parties have agreed on all terms.
RapStar's CEO then wrote on the bottom of the letter "we accept" and faxed the letter back to Suny that same day. A week later, on February 8, Suny sent RapStar a formal contract document which contained the terms listed in the letter proposal, except that it set a price of $2.00 per dozen if RapStar ordered less than 12,000 units per month. RapStar's CEO then called Suny and said that he thought they had agreed to the price of $1.50 per dozen, but was told Suny had to increase its price for smaller production runs because of an increase in materials costs. When RapStar's CEO expressed concern about their ability to pay that price, Suny's sales manager told him, "well, if you order at least 10,800 units (900 dozen), we may be able to give you the $1.00 price." After thinking about it for a few days, on February 12, RapStar's CEO added the following language to the document: "units to be delivered no later than the 15th of the month, time being of the essence." He then signed the formal contract with Suny. That contract also had the following language in it: "This contract is intended to be the final written expression of the parties' agreement and all prior communications, oral or written, are superseded by this document." When the signed contract was received by Suny's sales manager, he noticed the added language about time of delivery, initialed it, then signed the contract on February 15, 2009. From March 1, 2009 until November 1, 2009, things went smoothly. Each month, RapStar ordered, received and paid for at least 12,000 units. On November 1, 2009, however, RapStar ordered 10,800 units. The units were received on November 15, 2009, along with an invoice for $1,800, pricing the units at $2.00 per dozen. When RapStar's CEO called Suny, the sales manager told him he didn't remember any conversation about keeping the $1.00 price for 10,800 units, but that Suny couldn't lower the price anyway since their materials costs had risen yet again. RapStar paid the invoice, but their CEO wrote on the check "paid under protest." On December 1, 2009, RapStar ordered 12,000 units. Due to equipment malfunctions at their plant, caused by poor maintenance, Suny

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did not ship the CDs until December 18, 2009 and they were not received by RapStar until December 19, 2009. The delay in shipping meant that RapStar had to run its factory overtime to meet the month's quotas, costing an extra $2,000 in wages, and yet it still lost $10,000 in sales due to CDs it printed not making it to some stores in time for the last pre-Christmas sales rush. RapStar's CEO was furious, and called Suny and told the sales manager that RapStar was terminating the contract because of the late delivery. Q6. Did RapStar's faxing the signed term letter back to Suny on February 1, 2009, create an enforceable contract? a. Q7. Yes. b. No

When did the formal contract document that Suny sent to RapStar on February 8, 2009, finally become an enforceable agreement?

a. b. c.
Q8.

On February 12, 2009, when RapStar's CEO signed it. On February 15, when Suny's sales manager approved the added terms and signed it. It never became an enforceable agreement.

Assuming there was no misrepresentation, did Suny breach the formal contract when it billed RapStar $2.00 per dozen in November 2009? a. Yes. b. No

Q9.

Did Suny materially breach the contract when it was late delivering the December shipment? a. Yes. b. No

Q10. Assume the following for the purposes of this question: Suny materially breached the contract in December; the $10,000 in lost sales was the loss of profit under the contract to RapStar due to the breach; the $2,000 in extra labor costs was a consequential damage; and RapStar took every reasonable step it could to limit its damages. What are the total compensatory damages RapStar would recover in court under a value of the contract theory a. b. c. $1.00. $2,000.00 $10.000.00
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d.

$12,000.00

Answers and Analysis for Case 2:


Q6. Did RapStar's faxing the signed term letter back to Suny on February 1, 2009, create an enforceable contract? a. Yes. b. No

For a proposal by a party to be a legally acceptable offer, it must be communicated, be sufficiently definite (contain the essential elements of the proposal), and it must demonstrate intent to make an offer. In this case, the proposal sent met the communication and definiteness requirements, but it lacked intent. Suny indicated that the proposal was for negotiation purposes only, and advised that a formal contract had to be prepared after all terms had been agreed to. Thus, Suny did not make an offer that RapStar could accept, and the faxing of the term sheet could not be an acceptance.
Q7. When did the formal contract document that Suny sent to RapStar on February 8, 2009, finally become an enforceable agreement? a. b. c. On February 12, 2009, when RapStar's CEO signed it. On February 15, when Suny's sales manager approved the added terms and signed it. It never became an enforceable agreement.

This question is similar to Q3 above. When RapStars CEO added the time of delivery provision, his acceptance materially modified the offer and thus became a counterproposal. Thus, a final contract was not formed until the change was approved by Suny on February 15, accepting the counter-proposal.
Q8. Assuming there was no misrepresentation, did Suny breach the formal contract when it billed RapStar $2.00 per dozen in November 2009? a. Yes. b. No

The answer here is no for two separate reasons. First, the statement by Sunys sales manager that if you order at least 10,800 units (900 dozen), we may be able to give you the $1.00 price" is an illusory promise, because he put no condition whatsoever on the discretion of Suny to decide, and thus it could not have been a binding contractual commitment. Second, the statement was made prior to the final agreement being prepared and executed, and because the agreement has an integration clause (the final

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expression language), the parol evidence rule would bar the provision being enforceable absent fraud.
Q9. Did Suny materially breach the contract when it was late delivering the December shipment? a. Yes. b. No

it is clear that the contract required delivery by the 15th, and that Suny failed to make delivery. Thus, unless Sunys failure to perform is excused for some reason, it breached the contract. Sunys failure to perform would not be excused by operation of law in this case, because while it was impossible to perform due to the problems with the machinery, this was not objective impossibility. To be excused under the doctrine of impossibility, the circumstances must be such that no one could have performed the contractual provision, and in this case it was Sunys fault that the machinery did not work. Thus, it breached the contract. The next issue is whether the breach was material. Remember, not all breaches are material. In this case, however, RapStars CEO had added the language time is of the essence. That is a classic indicator that timely delivery is a material requirement of the contract. Suny is then in material breach, allowing RapStar to terminate further performance on the contract at its option and seek damages.
Q10. Assume the following for the purposes of this question: Suny materially breached the contract in December; the $10,000 in lost sales was the loss of profit under the contract to RapStar due to the breach; the $2,000 in extra labor costs was a consequential damage; and RapStar took every reasonable step it could to limit its damages. What are the total compensatory damages RapStar would recover in court under a value of the contract theory? a. b. c. d. $1.00. $2,000.00 $10.000.00 $12,000.00

The question asks you to calculate a specific type of damages, so you do not need to consider which types may be available. The formula for compensatory damages under the value of the contract theory is this: Lost Value or Profits (value of promised performance minus value of actual performance) minus Costs Avoided plus Incidental Damages plus Consequential Damages . You are given the figure of $10,000 in lost

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profits; there is no indication of costs saved; and the $2,000 in extra labor was a consequential damage. The formula gives us the figure of $12,000. Finally, we need to see whether any limitation on damages applies. RapStar took every reasonable effort to mitigate; these damages are clearly foreseeable; and nothing in the question suggests they are not sufficiently definite. No reduction will be made.

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